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Week In Review

China

The Chinese banking regulator mandated that at least a third of new loans must go to private firms (two thirds of new loans from smaller banks). This move is meant to address the difficulty firms are having obtaining financing in the face of an economic slowdown and large numbers of corporate defaults. Shares of Chinese banks dropped sharply and dragged down the broader Chinese market.

Our Take

This mandate indicates that the Chinese government is pushing aside all other concerns in an effort to stem the ongoing economic slowdown. Forcing banks to make loans that they otherwise wouldn’t make is likely to lead to even more defaults and bad debts, and this increases the risk of a Chinese financial crisis.

The Fed

As expected, the Federal Reserve Open Market Committee (FOMC) announced its decision to maintain the federal funds rate at the current target of 2% to 2.25%. According to the Fed statement, the labor market continued to strengthen, unemployment declined, and economic activity has been “rising at a strong rate.” The committee noted that household spending continued to grow strongly, while business investment moderated from its rapid pace. The committee also stated that inflation remains near its 2% target.

Our Take

There was no meaningful change in the statement from the previous meeting. Nothing in the statement hinted that Fed officials plan to deviate from the stated gradual path of rate increases. An increase in the fed funds rate in December remains likely.

Municipals

Voters across the country approved at least $24 billion of new bond sales this week to be used for various school, transportation, and infrastructure improvements. However, California voters rejected the $8.9 billion water infrastructure measure and Colorado voters did not pass the $6.5 billion and $3.5 billion measures for transportation and road projects.

Our Take

The number of bond measures on the ballot this year reached the highest level since 2006. Many municipalities are now willing to start spending money on infrastructure and improvements, as the economy has improved. Even though voters passed certain measures, supply may not immediately increase. It may take years before some bonds are issued and the infrastructure projects occur.